CRA’s ‘stupid mistake’ compels taxpayer to pay taxes on extra income

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I rarely get any physical mail anymore. In fact, if it weren’t for my weekly New Yorker magazine subscription, my mail carrier would have no reason to visit my front stoop. Over a decade ago, I switched all my bills (hydro, natural gas, home internet, credit cards, etc.) to email delivery, and this includes most tax slips, as well as correspondence from the Canada Revenue Agency.

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So, you can imagine my horror when I arrived home from work one dark, cold January evening this winter to find a solitary piece of mail: an oversized, brown envelope from the CRA. This was most unusual, since I’ve been receiving all my notices of assessment (and, occasionally, reassessment) via email notification, which requires me to log into the CRA’s My Account portal to view the notice. If the CRA was sending me oversized physical mail, it was unlikely to be a novelty cheque. I suspected something was awry.

Sure enough, my 2023 tax return was caught by the CRA’s matching program, which determined that I had “received investment income that appears to have been not fully reported.” Uh oh.

The reason for the large brown envelope was because the CRA, along with its letter to me, had enclosed two legal-sized spreadsheet printouts containing summaries of all my 2023 T5 and T3 Slips reporting investment income. Apparently, I had omitted to include some Canadian dividend income from a T5 slip from a secondary brokerage account I had.

Under the Income Tax Act, if you fail to report at least $500 of income in a tax year and in any of the three preceding taxation years, you can be hit with a “repeated failure to report income” federal penalty. This is calculated as the lesser of 10 per cent of the unreported income and 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission, and the amount of any tax paid in respect of the unreported amount, for example, by an employer through source deductions withheld. A corresponding provincial 10 per cent penalty is also often assessed.

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Fortunately for me, this was the first time I omitted income from a return, so I wasn’t assessed the repeated omission penalty, but was simply charged the tax on the dividends that I neglected to report, along with some arrears interest.

But for me, the bigger question was how could I have missed this T5 slip? My investigation began by pulling my 2023 paper file folder in which I had printed copies of various tax slips, donation receipts, medical expenses, and more. There I found my T4 slip, some T3s and T5s, various other RRSP, charitable and medical receipts, but the missing T5 was, well, missing.

I then went online to the CRA My Account and, to my surprise, the missing 2023 T5 slip still wasn’t showing up online, which is why the Autofill program, which I used last tax filing season to import my tax slips, didn’t input it. Yet the CRA obviously had a record of receiving it, since it was picked up by its matching program.

The next step was to turn to my brokerage firm to find out why I never received that T5 slip in the mail, despite having received mailed copies of T5 and T3 slips for my other non-registered account. After some investigation, it was determined that I had selected online tax reporting for this brokerage account, and, as a result, nothing was mailed or even emailed to alert me to log on to my online brokerage account, and download the T5 slip. Lesson learned.

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Tax slips can also cause problems for taxpayers who receive more than one slip from the same issuer. Are they duplicate slips, separate slips or amending slips? A recent tax case decided earlier this month highlights one taxpayer’s trouble with an amended slip.

The taxpayer is a real estate agent in British Columbia who incorporated a personal real estate corporation such that all real estate commissions he earned were income of the corporation. In 2019, the corporation received commission income from a single payor, which issued a T4A slip for 2019 in the amount of $53,258. It then issued an amended T4A for 2019 in the amount of $55,074.

The CRA then made, in the words of the Tax Court judge, “a stupid mistake.” Rather than recognizing that the amended T4A replaced the original T4A, the CRA added the amount reflected on the amended T4A to the amount reflected on the original T4A, leading to an erroneous reassessment of the corporation’s income for 2019 of $108,332.

The taxpayer testified that he first heard from the CRA by letter in August 2022, proposing to reassess his corporation for T4A income of $108,332 for the 2019 taxation year. The taxpayer testified that he called the author of that letter at least twice. He said that the author of the letter agreed that only the amount reflected on the amended T4A should be included in the corporation’s income. He made no notes of those conversations.

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The notice of reassessment for the 2019 taxation year was posted on the corporation’s secure online account on October 12, 2022. Under the Income Tax Act, a taxpayer has 90 days to object to a notice of (re)assessment, in this case that deadline being January 10, 2023. If a taxpayer misses the deadline, they can file an application within a year asking the CRA to extend the time to object. The extended date would therefore be January 10, 2024. Unfortunately, the taxpayer failed to object to the reassessment until March 24, 2024, which was too late.

In court, the taxpayer argued that he never saw the notice of reassessment. However, the CRA’s computer system showed that it was viewed online on four separate occasions. Notwithstanding that, the taxpayer said it was the CRA which erred in adding the two T4A slips together.

While the judge was sympathetic to the taxpayer’s situation, his hands were tied. As he wrote, “Although the (CRA) made a stupid mistake in reassessing, I have no discretion to extend the time limitations set out in the Act. … Why this egregious error was not rectified by the CRA’s internal ‘quality control’ remains a mystery.”

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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